Half-year Report

12 September 2018

Elecosoft plc

(“Elecosoft”, the “Company” or the “Group”)

Interim Results for the Six Months Ended 30 June 2018

and Directorate Change

Elecosoft plc (AIM: ELCO), the AIM-listed international construction software specialist, is pleased to announce its unaudited results for the six months ended 30 June 2018, and a directorate change.

Financial Highlights

·     Revenue up 5% to £10,554,000 (2017 H1: £10,010,000); up 7% at constant exchange rates

·     Operating profit up 15% to £1,221,000 (2017 H1: £1,059,000)

·     Operating profit before acquisition related costs up 46% to £1,544,000 (2017 H1: £1,059,000)

·     Adjusted operating profit* up 34% to £1,755,000 (2017 H1: £1,314,000)

·     Basic earnings per share up 18% to 1.3p (2017 H1: 1.1p)

·     Adjusted earnings per share* up 38% to 1.8p (2017 H1: 1.3p)

·     55% of revenue recurring (2017 H1: 54% of revenue)

·     Cash generated in operations up 71% to £2,865,000 (2017 H1: £1,676,000)

·     Net cash £2,668,000 (2017 H1: £259,000)

·     Interim dividend up 40% to 0.28p per share (2017 interim: 0.20p per share)

(* Adjusted profit measures exclude acquisition related costs and amortisation of acquired intangible assets.)

Operational Highlights

·     Acquisition in July of Shire Systems, a leading UK provider of computerised maintenance management software (CMMS)

·     Increased adoption of Powerproject BIM including its adoption by Ballast Nedam, a leading Dutch construction company, as their standard 4D planning tool

·     Release of a new retailer platform Pixmo for visualising ceramic tiles

·     Showcased the pre-release version of Memmo®, Elecosoft’s new site management software, alongside Powerproject® and Bidcon® at Nordbygg, Northern Europe’s largest construction exhibition in Sweden

·     Appointment of Mukul Mistry, BSc – Corporate Development Director

·     Appointment of David Dannhauser, FCA – Non-Executive Director

Directorate Change

Today the Company announces that Simon Morgan has resigned from the Board of the Company with immediate effect to pursue other interests. The Company also announces the appointment of Benjamin Moralee as Finance Director to replace Simon Morgan with immediate effect.

Benjamin Moralee has been Interim Deputy Finance Director of the Company since March 2018, working alongside the Board of the Company. Ben has extensive further experience in international finance positions having previously been Interim Head of Finance at Figleaves (part of N Brown Group PLC) and being Financial Controller for Serena Software Europe Limited (part of Micro Focus PLC), the international provider of IT management products, for ten years. Mr. Moralee qualified as a chartered accountant with Deloitte and is a Fellow of the ICAEW.

Executive Chairman, John Ketteley said: “Elecosoft has performed well in the first half of 2018. Our revenue growth has accelerated, cashflow remains strong, we have made good progress with our software development and the acquisition of Shire Systems has broadened and strengthened our product portfolio. I would like to thank Simon Morgan for his contribution in his time with the Company and wish him the best for the future, and welcome Ben to the Board. In light of the Company’s first half performance, we look forward to the remainder of 2018 with confidence.”

About Elecosoft plc

Elecosoft is listed on the Alternative Investment Market in London (AIM: ELCO). It is a specialist international provider of software and related services to the architectural, engineering, construction and digital marketing industries from centres of excellence in the UK, Sweden, Germany and the US. Elecosoft’s market-leading software solutions are developed by teams in the United Kingdom, Sweden and Germany, and its software programs cover project management, construction site management, estimating, timber engineering, 3D design and visualisation, and cloud based digital marketing solutions.

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

The following information regarding the appointment of Benjamin Stuart Moralee, aged 40, is disclosed under Schedule 2(g) of the AIM Rules for Companies:

Mr. Moralee has no shareholding in the Company.

There are no further disclosures required under Schedule 2(g) of the AIM Rules for Companies.

Chairman’s Statement

Trading Performance

Unaudited revenues in the first half of 2018 were £10,554k (2017: £10,010k), and the rate of increase in revenue at constant currencies was 7% (2017 full year: 4%, excluding acquisitions).

The revenue profile of the Group remains strong. The proportion of revenues derived from recurring maintenance and support contracts, as well as subscription-based contracts, was 55% of revenues in the period (2017: 54%).

Unaudited operating profit for the period was £1,221k (2017: £1,059k), and is stated after deducting £323k of acquisition related expenses. Before deducting the £323k of acquisition related expenses, operating profit from trading was up 46%. Adjusted operating profit from trading, before charging acquisition related expenses and amortisation of acquired intangible assets was £1,755k (2017: £1,314k), up 34%, and the adjusted operating margin improved to 16.6% (2017: 13.1%). This improved profitability reflects the strength of our core business, the benefits of scale as the business grows, and a continuing focus on cost management.

After deducting interest charges in the period of £38k (2017: £52k), profit before tax was £1,183k (2017: £1,007k). The tax charge in the period was £225k (2017: £203k).

Unaudited profit for the financial period was £958k (2017: £804k), an increase of 19% compared with the prior period, and equivalent to basic earnings per share of 1.3p per share (2017: 1.1p), an increase of 18%. Adjusted earnings per share, before charging acquisition related expenses and amortisation of acquired intangible assets, was 1.8p per share (2017: 1.3p), an increase of 38%.

A reconciliation of adjusted profit measures to reported measures is presented in note 13.

Financial Performance

The Group generated cash from operations in the period of £2,865k (2017: 2,277k), an increase of 26% compared with the comparative period. Adjusted operating cash flow, after deducting capital expenditures of £621k (2017: £593k) and before acquisition related cashflows of £43k (2017: nil), was £2,287k (2017: £1,684k), meaning that over the last 12 months the Group has converted 107% of adjusted operating profits into cash.

The strong cash flow generation of the business resulted in an improvement in our net cash position to £2,668k as at 30 June 2018, up from £1,031k at 31 December 2017.

Software Development

Software development expenditure in the period under review was broadly the same at £1,403k (2017: £1,398k) and represents the equivalent of 13% of revenue in the period (2017: 14%). We remain committed to the continued enhancement of our market-leading construction software portfolio offering to our customers worldwide.

Development expenditure that was capitalised in the period totalled £531k (2017: £494k). In Germany, Sweden and the UK, the major component of these software development projects have involved the introduction of SaaS web applications.

Operational Highlights

We continued to make progress toward our strategic priorities set-out on page 17 of the 2017 Annual Report to expand our portfolio and to address additional phases of the building lifecycle with the acquisition of Shire Systems.

We also continue to invest in research and development to expand our SaaS offerings and deliver best practice among development teams with the beta-release of our new SaaS site management tool Memmo® and our new SaaS project collaboration solution in the UK. We launched a new retailer platform Pixmo for the ceramic tile industry which produces room visualisations. We successfully exhibited at Nordbygg, Northern Europe’s largest construction exhibition in Sweden, showcasing Memmo® alongside Powerproject® and Bidcon®. Powerproject BIM was chosen by Ballast Nedam, a leading Dutch construction company, as their standard 4D planning solution.

Elecosoft successfully increased UK licence sales by 30% compared to the same period in 2017. We experienced challenges in the US due to slower uptake through resellers however this shortfall has been somewhat offset by growth in other international markets, principally Australia.

Acquisition and Financing of Shire Systems Ltd

On 4 July 2018 Elecosoft completed the acquisition of Shire Systems Ltd, a leading UK provider of computerised maintenance management software (CMMS), for a total consideration of £6.3m in cash; comprising an enterprise value of £5.1m on a cash and debt free basis, and an estimated £1.2m net cash, subject to a review satisfactory to Elecosoft of the cash, debt and working capital of Shire as shown in the completion accounts.

The acquisition represents a significant advancement in Elecosoft’s successful strategy of investing in synergistic software products and technologies to strengthen its construction software portfolio. It will extend Elecosoft’s software portfolio beyond early stage project planning, design and construction applications, to asset maintenance management applications for plant and equipment and building life cycle maintenance management. As at the end of 2017 Shire boasted over 800 active customers and 3,500 users of its products including organisations engaged in a diverse range of industries. Shire Systems reported unaudited revenues of £1.9m for the year to 31 December 2017, and unaudited profit before tax of £0.7m, adjusted to add back £0.3m of exceptional vendor remuneration.

The acquisition was financed by incremental borrowings of £6m as part of a new five-year fixed term loan of £8m from Barclays Bank, which consolidated Elecosoft’s outstanding borrowings from Barclays of £2m. The Directors consider that in the absence of unforeseen circumstances, the Group will be in a position to comfortably service and repay its medium-term Sterling borrowings in accordance with their terms.

My colleagues and I extend a warm welcome to the Shire Systems team who bring extensive knowledge and experience to the Elecosoft group.

Board and Management

I was pleased to announce in February the appointment of David Dannhauser, FCA as a Non-Executive Director. David Dannhauser has been CFO of a number of listed companies in the past 20 years, including the position of CFO of Elecosoft from 1994 to 2010, at which time he was closely involved in the establishment and development of the Group’s software activities, which today form the core of Elecosoft’s software operations. He has also advised a number of companies on their capital raising, M&A and strategic planning activities.

In June Mukul Mistry was appointed to the Board as Corporate Development Director. Mukul has extensive international experience in the software industry, having previously served on the board of systems integration and services business HTSA Pty Ltd in South Africa and advised the boards of a number of international software technology companies on their strategic development. I believe that Mukul’s international experience and technical background will be invaluable to us as we focus increasingly on the development and strategic direction of Elecosoft.

I am sad to also report that Simon Morgan has resigned as Finance Director of Elecosoft in order to pursue opportunities elsewhere. He will be replaced by Ben Moralee, who has been with Elecosoft since March 2018 working on a number of projects, including the successful acquisition of Shire Systems. I am delighted to welcome Ben to the Board. The whole Board and I are very grateful for Simon’s contribution to the business over the last year and wish him every success with his future career.

Interim Dividend

Having regards to Elecosoft’s strong trading performance and cash generation in the period under review, the Board has decided to declare an increased interim scrip dividend of 0.28p per ordinary share (2017: 0.20p), or alternative cash dividend of 0.28p per ordinary share (2017: 0.20p), an increase of 40%, covered 4.6 times by unaudited earnings for the period of 1.3p per ordinary share.

The scrip reference price is 84.8p, calculated from the average of the closing price for an ordinary share of the company as derived from the daily official list of the London Stock Exchange during the period of five dealing days ending 10 September 2018. The interim dividend will be paid on 31 October 2018 to shareholders on the register at the close of business on 21 September 2018 and the ex-dividend date will be 20 September 2018. The cash alternative election will close at 5pm on 17 October 2018.

Outlook

Elecosoft is a people business, and I am pleased to say that every unit whether in the UK, Sweden, the Netherlands, Germany or the US, has performed well in the period under review. We have also made good progress with new software development initiatives in the period and also with our branding and sales reach.

Approximately a third of our revenue in the first half of 2018 was earned in the UK, with two thirds in Scandinavia, elsewhere in Europe, Australia or the US. The majority of our operating profits are earned in, and employees based in Sweden, Germany, the Netherlands, Belgium and the United States. This, combined with the recurring nature of our revenues, means that I believe we remain resilient to any potential effects of Brexit.

We continue to see significant opportunities particularly in construction, but also in other related sectors that we currently serve, as we further develop our software to improve the timeliness, cost-efficiency and risk profiles of our customers’ projects. The launch of products such as Memmo, our new site management tool, and the addition of Shire Systems’ CMMS software further enhances our position as a market leading provider of software across all the phases of a construction project and the lifecycle of a building.

My colleagues and I look forward with confidence to the future.

Condensed Consolidated Income Statement

for the financial period ended 30 June 2018

Condensed Consolidated Statement of Comprehensive Income

for the financial period ended 30 June 2018

Condensed Consolidated Statement of Changes in Equity

for the financial period ended 30 June 2018

Condensed Consolidated Balance Sheet

at 30 June 2018

Condensed Consolidated Statement of Cash Flows

for the financial period ended 30 June 2018

Notes to the Condensed Consolidated Interim Financial Statements

1. General information

The company is a public limited company incorporated and domiciled in the UK. The address of its registered office is 66 Clifton Street, London EC2A 4HB.

The company is listed on the Alternative Investment Market (“AIM”).

The condensed consolidated interim financial information does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The Group’s consolidated financial statements for the year ended 31 December 2017 have been filed at Companies House. The audit report was not qualified and did not contain a statement under section 498(2) or section 498(3) of the Companies Act 2006.

2. Basis of preparation

The condensed consolidated interim financial statements for the six months to 30 June 2018 have been prepared in accordance with the accounting policies which will be applied in the twelve months financial statements to 31 December 2018. These accounting policies are drawn up in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and as adopted for use in the European Union that are effective at 30 June 2018.

The condensed consolidated interim financial statements are unaudited. They do not include all the information and disclosures required in the annual financial statements, and therefore should be read in conjunction with the Group’s published financial statements for the year ended 31 December 2017. The comparative figures for the year ended 31 December 2017 are not the Company’s statutory accounts for that period but have been extracted from these accounts.

The Directors, having considered the Group’s current financial resources, have concluded that they are adequate for the Group’s present requirements. Therefore, the condensed consolidated interim financial information has been prepared on the going concern basis.

The Group has adopted new accounting pronouncements, which have become effective this year, as follows:

IFRS 15 “Revenue from Contracts with Customers”. IFRS 15 ‘Revenue from Contracts with Customers’ and the related ‘Clarifications to IFRS 15 Revenue from Contracts with Customers’ (hereinafter referred to as ‘IFRS 15’) replace IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’, and several revenue-related Interpretations. A review of Elecosoft’s existing products and contracts has concluded that the adoption of IFRS 15 has no impact on the results or financial position of the Group.

IFRS 9 “Financial Instruments”. IFRS 9 replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’. It makes major changes to the previous guidance on the classification and measurement of financial assets and introduces an ‘expected credit loss’ model for the impairment of financial assets, as well as containing new requirements on the application of hedge accounting. The adoption of IFRS 9 has had no impact on the results or financial position of the Group.

Furthermore, new standards, new interpretations and amendments to standards and interpretations that have been issued but are not effective for the current period have not been adopted early.

Estimates

Application of the Group’s accounting policies in preparing condensed consolidated interim financial statements requires management to make judgements and estimates that affect the reported amount of assets and liabilities, revenues and expenses.  Actual results may ultimately differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2017.

Risks and uncertainties

A summary of the Group’s principal risks and uncertainties was set out on pages 24 to 25 of the 2017 Annual Report and Accounts. The Board considers these risks and uncertainties are still relevant to the current financial year and the impact of changes in the UK economy is reviewed in the Chairman’s statement contained in this report.

The Interim Report was approved by the Directors on 11 September 2018.

3. Revenue

Revenue disclosed in the income statement is analysed as follows:

The categories of revenue have been updated to include subscription-based revenue in recurring maintenance, support and subscription revenue, and prior period amounts have been restated accordingly.

Revenue is recognised for each category as follows:

·     Licence sales – recognised on delivery of the software licence

·     Maintenance, support and subscriptions – recognised systematically over the contractual period of contract

·     Services – recognised on delivery of the service

4. Segmental information

Operating segments

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance.

The chief operating decision maker has been identified as the Executive Directors. The Group revenue is derived entirely from the sale of software licences, software maintenance and support and related services. Consequently, the Executive Directors review the three revenue streams, but as the costs are not recorded in the same way, the information is presented as one segment and as such the information is presented in line with management information.

Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, and adjusted to exclude acquisition related expenses.

Geographical, product and sales channel information

Revenue by geographical segment represents revenue from external customers based upon the geographical location of the customer.

Revenue by product group represents revenue from external customers.

The Group utilises resellers to access certain markets. Revenue by sales channel represents revenue from external customers.

5. Operating profit

Operating profit for the period is after charging the following items:

6. Net finance cost

Finance income and costs disclosed in the income statement is set out below:

7. Earnings per share

The calculations of the earnings per share are based on profit after tax attributable to the ordinary equity shareholders of the Company and the weighted average number of shares in issue for the reporting period.

Shares held by the Employee Share Ownership Trust are excluded from the weighted average number of shares in the period. Adjusted profit attributable to shareholders is reconciled to reported profit attributable to shareholders in note 13.

8. Dividends

Dividends paid in the six months to 30 June 2018 comprised the 2017 final dividend of 0.40 pence per ordinary share (2017: 0.20 pence per ordinary share).

The 2017 final dividend was declared as a scrip dividend, with a scrip reference price of 49.6, with shareholders having the opportunity to receive an alternative cash dividend of 0.40p per share.

Scrip dividends were issued in the six months to 30 June 2018 as follows:

Cash dividends of £110k (2017: £133k) were paid in the six months to 30 June 2018 as follows:

The Directors have recommended the payment of an interim scrip dividend of 0.28p per ordinary share, or an alternative cash dividend of 0.28p per ordinary share (2017 interim: 0.20p). The scrip reference price is 84.8p, calculated from the average of the closing price for an ordinary share of the Company as derived from the official list of the London Stock Exchange during the period of five dealing days ending 10 September 2018.

9. Other intangible assets

Other intangible assets comprise capitalised development costs, acquired customer relationships and purchased intangible assets. Additions in the six months to 30 June 2018 represent purchased intangible assets of £20,000 (2017: £37,000) and internal development costs capitalised of £531,000 (2017: £494,000) Internal development relates to software development projects that meet the accounting policy criteria for capitalisation.

10. Cash and borrowings

The net cash position of the group as at 30 June 2018 is set out below.

On 4 July 2018 the group refinanced its existing borrowings into a new five year fixed term loan of £8m with Barclays Bank. The new facility was used to finance the acquisition of Shire Systems Ltd for £5.1m on a cash and debt free basis.

The new facility is repayable over five years, with equal quarterly instalments of £0.4m, commencing from October 2018. The interest rate has been fixed for three years at 3.768%. The group also retains its existing £1.0m overdraft facility. Security provided to the bank comprises a cross guarantee and debenture between Elecosoft plc and certain group subsidiaries.

11. Accruals and deferred income

Deferred income represents income from software maintenance and support contracts and is taken to revenue in the income statement on a straight-line basis in line with the service and obligations over the term of the contract.

12. Related Party Disclosures

Transactions between Group undertakings, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

The Directors of the Company had no material transactions with the Company during the six months to 30 June 2018, other than a result of service agreements. An amount of £36,250 (2017: nil) was paid to JHB Ketteley & Co Limited under a lease for occupation by the Group of its London head office and £2,500 (2017: £3,000) was paid to JHB Ketteley & Co Limited for a contribution to the office costs at Burnham-on-Crouch.

13. Additional performance measures

The Group uses adjusted figures, which are not defined by generally accepted accounting principles (“GAAP”) such as IFRS. Adjusted figures and underlying growth rates are presented as additional performance measures used by management, as they provide relevant information in assessing the Group’s performance, position and cash flows. We believe that these measures enable investors to track more clearly the core operational performance of the Group, by separating out items of income or expenditure relating to acquisitions, disposals and capital items. Our management uses these financial measures, along with IFRS financial measures, in evaluating the operating performance of the Group.

14. Post balance sheet events

On 4 July 2018, the Group acquired Shire Systems Limited (“Shire Systems”), a profitable leading UK provider of computerised maintenance management software (CMMS), from Shiresoft Ltd, for a total consideration of £6.3m in cash; comprising an enterprise value of £5.1m on a cash and debt free basis, and an estimated £1.2m net cash, subject to review of the completion accounts and working capital. Professional and other fees of £0.3m in relation to the acquisition were expensed in the period to 30 June 2018 as acquisition related expenses.

Shire Systems reported revenues of £1.9m for the year to 31 December 2017, and profit before tax of £0.7m, adjusted to add back £0.3m of exceptional vendor remuneration. Net assets reported at 31 December 2017 were £1.1m. Unaudited management accounts of Shire Systems for the first six months of 2018 show revenue of £1.2m and profit before tax of £0.5m, after adjusting for revenue deferrals to align with Generally Accepted Accounting Principles. The acquisition was financed by a new five-year fixed term loan, as set out in note 10.

The Group is in the process of determining the fair values of the acquired assets and assumed

liabilities of Shire Systems. The valuation is expected to be completed before year-end.

15. Exchange rates

The following exchange rates have been applied in preparing the condensed consolidated financial information: